159 MP Corp.: Grateful That Majority Rejected Dissent's Radical Approach

The landlord sent a requisite 15-day notice to cure. Before the end of the cure period the tenants brought suit for a declaratory judgment that they were not in default, joined with a request for a so-called "Yellowstone" temporary injunction maintaining the status quo pending the disposition of the action.

Each of the leases contained a clause, concededly clear and unambiguous, that the tenant "waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease." In reliance on that express waiver, the landlord moved for summary judgment dismissing the action and the Yellowstone application. Both lower courts agreed that the waiver barred the tenants' claims. Four judges of the Court of Appeals also agreed that the plain meaning of the waiver controlled.

The Majority's Position

The 159 MP Corp. majority opinion invokes the well-recognized interpretive tradition of the New York courts relying on the clear and unambiguous language within the four corners of the leases to ascertain and then enforce the contracting parties' intent while excluding any resort to extrinsic evidence of intent. The majority held that this text-based means of interpreting contracts was "[i]n keeping with New York's status as the pre-eminent commercial center in the United States, if not the world." 159 MP Corp., 33 N.Y.3d at 359.

The majority's position in 159 MP Corp. echoed the justification for the New York interpretive method expressed in well-settled precedents. The New York approach, the cases hold, "imparts stability to commercial transactions …. [A]nalysis that begins with consideration of extrinsic evidence of what the parties meant … unnecessarily denigrates the contract and unsettles the law." W.W.W. Assoc's. v. Giancontieri, 77 N.Y.2d 157, 162-63 (1990) (Kaye, J.) (internal quotation marks omitted). The majority in 159 MP Corp. held that New York's textualist tradition exalts freedom of contract as its guiding principle-enforcing agreements as written. Voiding contractual obligations voluntarily arrived at for reasons of public policy, therefore, must be extremely narrowly applied. Thus, the majority held: "there is simply nothing in our contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgement actions … is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease." 159 MP Corp., 33 N.Y.3d at 363.

The Dissent's Position

What has engendered my deep concern is not just the dissenters' disagreement with the result of the majority's holding, but the dissenters' doctrinal rationale for doing so and its implications for radical departure from New York's traditional rules for interpreting and enforcing contractual obligations and adherence to freedom of contract itself. That concern has prompted me, out of loyalty and reverence toward the court as an institution, to overcome my strong reticence against publicly commenting on the work of my successors on the Court of Appeals. Analysis of the dissent discloses that its primary rationale is the adoption and application of pure "Economic Analysis of Law" doctrine to invalidate on public policy grounds the parties' express contractual waiver of the declaratory judgment remedy. This rationale constitutes a first in contract jurisprudence of any member of New York's highest court.

Moreover, as will be evident from a review of the general language of the dissent, it foretells that Economic Analysis of Law will be applied not just to remedy waiver issues, but also to all other disputes concerning contract interpretation and enforcement. Thus, the dissenters write that "[w]e make some agreements legally enforceable because of the societal benefit from doing so." 159 MP Corp., 33 N.Y.3d at 369 (Wilson, J., dissenting). Freedom of contract is no longer an overarching guiding principle of the New York common law of contracts for the dissenters, and instead "freedom of contract is not an individual right, but rather is grounded in the benefit to society at large." Id. The dissent makes clear that such societal benefits are weighed in accordance with classic economic values of wealth and efficiency: "The free-market system is driven by the principle that contracting parties will reach agreements that maximize social welfare (output, thought of as price, quantity and quality) by maximizing their individual interests through bargaining in a market in which buyers and sellers exist and transaction costs are as low as possible …. [C]ontracts are a way that economic actors can obtain some measure of security about an otherwise uncertain future." Id. at 370.

Applying their economics-based analysis to the issue in 159 MP Corp., the dissenters assert that the declaratory judgment remedy is a vital tool in the economic universe of commercial transactions because it is a means of reducing uncertainty — "itself a form of transaction cost that society has a clear interest in minimizing." Id. at 372. Therefore, the waiver of the remedy is unenforceable.

The dissent relies for support of its position on the classic 1972 work "Economic Analysis of Law" by then-University of Chicago law professor (later Seventh Circuit judge) Richard A. Posner, id., the most prolific writer/advocate for the broadest application of classic economics theory to analyze and resolve legal problems. The declaratory judgment remedy, claim the dissenters, promotes efficient use of resources; the majority's error in upholding the waiver of that remedy in the name of freedom of contract is treating that concept as "an individual right when its raison d'etre is the economic advancement of society." Id. at 373.

Analysis

I believe that the dissenters' willingness to look behind the plain language of a contract, weigh what the dissent views as the relative costs and benefits of the provisions agreed to by the contracting parties, and reject contract language that the dissent deems contrary to public policy — all under the ostensible rubric of the tenets set forth in Economic Analysis of Law — is wrong and unsettling, for a variety of fundamental reasons.

First, the dissenters' approach is counter-productive to their own goals. The dissenters dismiss the traditional New York canons of contract interpretation. Yet, in fact, those canons promote the economic values of stability, efficiency of enforcement and predictability of results that the dissenters claim to be promoting. Two separate studies, by prominent Law and Economics scholars no less, confirm the efficacy of the New York approach: Alan Schwartz and Robert E. Scott, "Contract Interpretation Redux," 119 Yale L.J. 926 (2010); and Theodore Eisenberg and Geoffrey P. Miller, "The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly Held Companies' Contracts," 30 Cardozo L. Rev. 1475 (2009). These scholars found that New York contract law is overwhelmingly favored over the nearest state rivals by companies and transactional lawyers as the governing choice of law for their contracts. Both studies confirm that New York contract law is favored in choice-of-law clauses three times more often than that of Delaware and six times more often than that of California. See, Schwartz and Scott, supra at 957, 957 n.73; Eisenberg and Miller, supra at 1489-90. Schwartz and Scott point out that New York's narrow, stable and predictive interpretive rules encourage contracting parties and their lawyers to carefully and comprehensively set forth in their contracts clear resolutions of potential interpretive conflicts, both substantive and procedural. This results in minimizing the risk of high litigation costs, because most disputes over the meaning of contract terms will be obviated by applying clear precedent or resolved by pre-trial summary judgment. "It is less costly to write a contract than to try a case." Schwartz and Scott, supra at 946.

New York also leads by substantially similar margins over other jurisdictions when contracting parties designate a forum for possible future litigation.

It is noteworthy for assessing the 159 MP Corp. dissent that Schwartz and Scott criticize activist courts for seeking to find the parties' true intent outside the four corners of the contract in the name of freedom of contract. "The contextualists, however, cannot justify rules that so significantly restrict contractual freedom in the name of contractual freedom." Schwartz and Scott, supra at 963.

The dissenters apparently accept and embrace whole-cloth Judge Possner's assertion that "the only sound basis for a legal rule is its social advantage, which requires an economic judgment balancing benefits and costs." Richard A. Posner, "The Path Away from the Law," 110 Harv. L. Rev. 1039, 1041 (1997). Thus, the dissenters claim: "Whether the state chooses to enforce certain types of agreements turns on whether enforcement would generally advance society's [economic] interests." 159 MP Corp., 33 N.Y.3d at 371.

There is a certain irony in the timing of the dissenters' belated discovery and adoption of Posnerian Economic Analysis of Law in its extreme original form, claiming that all legal issues of any substance may be resolved through a purely policy-based economics analysis. In at least the last two decades, Economic Analysis of Law has come under severe criticism for failing to take into account and apply other relevant values, such as stability and common morality, in resolving legal disputes. In making the "economic advancement of society" the decisive factor in contracts jurisprudence, the 159 MP Corp. dissenters and the lawyer/economics analysts turn on its head the most basic premise of any democratic legal system. That is, as Prof. Jules L. Coleman aptly put it, that "[t]he judge is there … to serve [the parties]-to do justice between them; they are not there to serve the judge in his policy-making capacity." Jules L. Coleman, "The Practice of Principle: In Defense of a Pragmatic Approach to Legal Theory," (2001).

The shortcomings of the pure Economic Analysis of Law approach urged by the dissent in 159 MP Corp. has, moreover, been recognized even by some of those who were instrumental in its origination. As early as 2003, U.S. Circuit Judge Guido Calabresi for the Second Circuit Court of Appeals — generally acknowledged (including by Judge Posner) as an original co-founder of modern Law and Economics jurisprudence — concluded that the Economic Analysis of Law cannot lay claim to having a monopoly of answers to difficult and challenging legal issues and that Law and Economics is only one of a number of schools of legal thought that can provide some valuable insight to such issues, but not complete answers. See, Guido Calabresi, "An Introduction to Legal Thought: Four Approaches to Law and to Allocating Body Parts," 55 Stan. L. Rev. 2113 (2003).

More recently, Judge Calabresi has expressed profound criticism of those law/economic analysts who, much like the 159 MP Corp. dissenters, look exclusively to classic economics theory for resolution of weighty legal problems. See, Guido Calabresi, "The Future of Law and Economics: Essays in Reform and Recollection" (2016). Judge Calabresi criticizes Economic Analysis of Law for failing to take into account external moral costs and knowledge costs and values and notes the flaws in classic economics theory shown by the emergent school of behavioral economics which undermine the doctrinal foundations of pure Economic Analysis of Law.

None of the above developments in modern critical assessment of the Economic Analysis of Law doctrine is acknowledged by the dissent in 159 MP Corp. It is as if the Law and Economics movement was frozen in time at the 1972 publication — over 45 years ago — of Posner's Economic Analysis of Law. This apparent lack of interest in, or awareness of, the subsequently demonstrated shortcomings of the doctrine the dissenters rely upon shows a lack of in-depth research and analysis one would hope for regarding such a radical departure from existing law.

Other Problematic Aspects of the Dissent

Perhaps due to the dissenters' need to legitimize their new-found, economics-based, approach to contract interpretation and enforcement, they engage in what appears to be questionable use/non-use of precedents and faulty logic and analogical reasoning in order to reach the result they seek. Thus, the dissent repeatedly asserts that freedom of contract has no independent value and that it should only apply to contractual promises advancing economic efficiency and societal wealth: "Freedom of contract is not an individual right, but rather is grounded in the benefit to society at large." 159 MP Corp., 33 N.Y.3d at 369. That contention simply ignores the holding by New York's Court of Appeals in Miller v. Continental Ins. Co., 40 N.Y.2d 675, 679 (1976) "that 'the right of private contract is no small part of the liberty of the citizen'" (quoting Balt. & Ohio Sw. Ry. Co. v. Voight, 176 U.S. 498, 505 (1900) (emphasis added), in rejecting a public policy defense to an insurance claim). This notion of freedom of contract underlies the entire body of New York contracts law under which, provided that the contract was freely entered into, the parties' reasonable expectations, as expressed in plain, unambiguous contractual language, are enforced. That is why the 159 MP Corp. case was correctly decided.

In the total absence of case law support for the dissenters' elevation of the declaratory judgment to an ascendency over contrary expressly bargained for contractual terms, they claim that such a result is supported by a legislative intent to "afford [] the courts broad leeway in issuing declarations." 159 MP Corp., 33 N.Y.3d at 375. Yet the dissent concedes "that there is no formal legislative history" to back up that assertion. Id. The dissent then falls back on a secondary source, Louis S. Posner, "Declaratory Judgments in New York," 1 St. Johns L. Rev: (No. 2, art 2), 129 (1927), which also neglected to cite to any relevant legislative history.

Then, the dissent resorts to an argument that, in my judicial experience is unprecedented: It cites to the legislative history of a later-enacted statute by a different legislative body as "instructive," i.e., the Federal Declaratory Judgment Statute subsequently enacted by Congress. See, 159 MP Corp., 33 N.Y.3d at 375.

Moreover, a most distinguished New York Court of Appeals bench, including, such luminaries as Cardozo, Pound, Lehman, and Crane, implicitly rejected L.S. Posner's thesis that the New York statute conferred broad powers on the courts in issuing declarations: In James v. Alderton Dock Yards Ltd., 256 N.Y. 298, 305 (1931), the court held instead that "where there is no necessity for resorting to the declaratory judgment, it should not be employed."

James was one of two cases that were misused by the dissenters. The second was Kalisch-Jarcho v. City of New York, 72 N.Y.2d 727 (1988). In James, the Court of Appeals reversed a declaratory judgment granted by the courts below, which had awarded the plaintiff the right to a sales commission, and dismissed the complaint. The court further held that the mere availability of an action at law for the sales commission negated any necessity for declaratory relief. 256 N.Y. at 305. The 159 MP Corp. majority correctly cited James as negating the dissent's claim that declaratory judgments "constitute [such a] vital strand" in contract jurisprudence that it supersedes any voluntary waiver of that remedy. To the contrary, the James decision relegated the declaratory judgment to a fallback remedy when no other is available.

In Kalisch-Jarcho, the court reversed a declaratory judgment entitling a city contractor to payment for work performed on a New York City construction contract. In rejecting the contractor's public policy argument, the court held that the dispute resolution provision in the construction agreement between the plaintiff and the City precluded resort to a declaratory judgment. 42 N.Y.2d at 732. The majority in 159 MP Corp. correctly cited Kalisch-Jarcho as inconsistent with the dissenters' view that as a matter of public policy, contracting parties are incapable of effectively agreeing to preclude resort to a declaratory judgment to resolve their dispute. 33 N.Y.3d. at 365.

The dissenters claim, however, that James and Kalisch-Jarcho are distinguishable. Their reasoning is set forth in footnote 3 of the dissent: "In James we upheld the denial of declaratory relief as an appropriate exercise of the trial court's discretion." 159 MP Corp., 33 N.Y.3d at 377 n.3. In point of fact, however, the Court of Appeals in James did not uphold the lower courts' discretionary denial of declaratory relief." Rather, it reversed, as a matter of law, the discretionary granting of declaratory relief by the lower courts, because of the availability of an action at law to attain the same objective.

The dissent in footnote 3 likewise mischaracterizes Kalisch-Jarcho: "The denial [of a declaratory judgment] again was for discretionary reasons." Id. However, the Court of Appeals in Kalisch-Jarcho reversed the exercise of discretion by the lower courts granting a declaratory judgment. The only such denial was by the Court of Appeals, and it surely was not "for discretionary reasons," because the Court of Appeals, as a pure court of law, lacks power to review or reweigh the lower courts' exercise of discretion (apart from any abuse of discretion as a matter of law). See, Arthur Karger, The Power of the Court of Appeals §16.3 (rev. 3d ed. 2005).

Next, the 159 MP Corp. dissenters attempt to justify striking the parties agreed waiver of a declaratory judgment remedy in a classic non sequitur. "The ability to obtain declaratory relief is a part of our state's public policy because it is an essential part of the policy of freedom of contract." 159 MP Corp., 33 N.Y.3d at 373. That is, the contracting parties should be denied the freedom to agree to such a waiver, in the name of freedom of contract! As previously noted, distinguished Law and Economic scholars have criticized contract interpretive theorists who likewise "restrict contractual freedom in the name of contractual freedom." Schwartz and Miller, supra at 963.

Finally, comment is warranted on the 159 MP Corp. dissenters' suggestion that an analogy exists between the majority's reliance on freedom of contract to enforce the parties' waiver of a declaratory judgment remedy and the U.S. Supreme Court's decision in the infamous case of Lochner v. New York, 198 U.S. 45 (1905). The dissenters claim that both court majorities exalt freedom of contract "solely [as] a personal right, rather than an important ingredient to the formation and advancement of society as a whole." 159 MP Corp., 33 N.Y.3d at 373. In my view, the claimed relationship between the 159 MP Corp. majority and Lochner is entirely tenuous. In Lochner the U.S. Supreme Court invalidated a New York statute regulating bakery workers' hours of employment. As Justice Holmes accurately pointed out in dissent, the court in Lochner effectively incorporated laissez-faire economics theory into the protected liberty interest of the 14th Amendment. As explained in the separate Lochner dissent of the first Justice John Marshall Harlan, the state legislature had sought to protect non-unionized bakery workers, having no bargaining power whatsoever, from the well-known health risks of protracted weekly 60-plus hours' exposure to flour dust in bakeries. It frankly escapes me how some meaningful connection purportedly exists between the Lochner court and the 159 MP Corp. majority's enforcement of a single clause among other interlocking clauses in copiously negotiated commercial leases between parties of substantial means and economic power, as is reflected in the annual lease rentals from between some $341,000 to over $564,000. I would suggest a more accurate analogy is that between the dissenters in 159 MP Corp. and the Lochner majority, that is, activist judges seeking to impose their own economic policy preferences on the parties and the public at large.

Conclusion

The dissenters in 159 MP Corp. proposed a radical new approach to contract interpretation and enforcement. They rejected the traditional interpretive principles of New York contracts law favored by business parties and their lawyers, in favor of the application of classic economics theories to achieve a favored result. Applying pure classic economics to resolve legal disputes over contracts, as urged by the dissenters, would undermine the stability and certainty of New York contracts jurisprudence. Courts would no longer be restrained by settled, readily followed precedents. Instead, each lawsuit would likely entail an inherently subjective and ad hoc search for which outcome urged by the parties, and backed up by opposing expert economists, would best produce economic efficiency and societal wealth. The bench, bar, and business communities owe a debt of gratitude to the 159 MP Corp. majority for resolutely rejecting the dissent's position.

*****

Howard A. Levine is Senior Counsel at Whiteman Osterman & Hanna. He was an associate judge on the New York State Court of Appeals from 1993 to 2002. This article also appeared in the New York Law Journal, an ALM sibling of Commercial Leasing Law & Strategy.